NewMarket Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. NewMarket’s principal business is petroleum additives, including lubricant and fuel additives; “All other” includes tetraethyl lead and certain contract manufacturing.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $620.4 million | $583.8 million | $1,196.9 million | $1,143.5 million |
| Operating profit | $104.5 million | $93.1 million | $194.6 million | $189.5 million |
| Income from continuing operations | $66.8 million | $64.4 million | $124.3 million | $131.3 million |
| Net income | $66.8 million | $64.0 million | $124.3 million | $131.8 million |
| Diluted EPS | $5.24 | $4.81 | $9.66 | $9.88 |
| Operating cash flow | Not separately stated for the quarter | $84.5 million | $122.9 million |
- Q2 revenue rose 6.3%; six-month revenue rose 4.7%. Q2 net income increased about 4.3%, while six-month net income declined about 5.7%.
- Gross margin was approximately 29.1% in Q2 versus 29.0% a year earlier; for six months it was 28.6% versus 29.5%. Operating margin was approximately 16.8% versus 15.9% in Q2, and 16.3% versus 16.6% for six months.
- Petroleum additives revenue increased 6.2% in Q2 and 4.6% for six months. Lubricant-additive shipments drove growth; fuel-additive shipments were essentially flat, with unfavorable product mix and lower selling prices weighing on sales.
- Cash and cash equivalents were $113.6 million at June 30, down $125.1 million from year-end. Working capital was $587.0 million; the current ratio was 3.39.
- Total long-term debt was $353.5 million, including $350 million of 4.10% senior notes due 2022 and $4 million drawn on the revolving facility. The $650 million facility had $642.9 million unused, including the effect of letters of credit. The company reported compliance with debt covenants.
- Six-month capital expenditures were $20.7 million. Dividends declared were $2.20 per share for the six-month period, versus $1.80 in 2013.
Changes, outlook and key risks
- Revenue growth reflected higher lubricant-additive shipments and favorable foreign currency, partly offset by lower selling prices. Overall petroleum-additive shipments grew 7.2% in Q2 and 6.6% for six months.
- Operating profit rose in Q2 and for the six-month period, despite an unfavorable foreign-currency impact on segment operating profit of approximately $4 million and $10 million, respectively. Six-month earnings were affected by the interest-rate swap: the company recorded a $4.5 million loss in the first half of 2014, versus a $5.8 million gain in the comparable 2013 period. The swap is not hedge-accounted, so fair-value changes flow through earnings.
- Operating cash flow fell year over year, principally reflecting a $65.7 million working-capital cash use, including higher receivables and inventories and lower accrued expenses. Share repurchases used $162.9 million of cash and dividends used $28.2 million in the first half; 454,400 shares were repurchased for $167.3 million in total.
- Management expected solid petroleum-additives performance in 2014 and industry shipment-demand growth averaging 1%–2% annually over the next five years; it aims to outgrow the industry over the long term. No specific full-year revenue or earnings guidance was provided. Management expected 2014 R&D expense to exceed 2013 and estimated full-year capital spending of $80–$100 million.
- The company broke ground on a Singapore manufacturing facility expected to begin operating in late 2015, with investment exceeding $100 million. A 30-year land lease adds approximately $700,000 in annual operating-lease obligations.
- Risks include raw-material and transportation availability, supply disruption, competition, customer concentration changes, foreign-exchange and international operating risks, regulation, and environmental or legal liabilities. The Department of Justice was reviewing certain foreign business activities concerning sanctions and anti-corruption compliance, as well as historical domestic-market conduct; the company said it was cooperating and conducting an internal review.
- Environmental remediation accruals were approximately $17 million at June 30. Management considered known matters adequately accrued but cautioned that unexpected costs could significantly affect financial position, results or cash flows. The company said ordinary legal proceedings were not expected to have a material adverse effect.
- Cash held by foreign subsidiaries was approximately $110.1 million; some was treated as indefinitely reinvested. Repatriation of those earnings could result in incremental U.S. tax. Management expected operating cash and available borrowing capacity to cover foreseeable operating needs.
Investor verification priorities
- Review the drivers and sustainability of lubricant-additive volume growth, lower selling prices, product mix and foreign-exchange effects.
- Assess working-capital needs, cash conversion and the planned $80–$100 million capital-spending program, including the Singapore project.
- Evaluate the scale and timing of share repurchases and dividends relative to cash generation, particularly given the first-half cash decline.
- Track the interest-rate swap’s fair value, collateral requirements and earnings volatility, as well as debt covenant headroom.
- Monitor the DOJ review, environmental remediation estimates and any developments that could change disclosed contingencies or tax exposure on foreign cash.